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Why Hotels Will Likely Get Stuck With Honolulu Rail Tab

Three months after the regular session ended without a deal to save Honolulu’s struggling rail project, the Legislature is poised to consider a new funding bill during a special sessionnext week.

Although details of the bill aren’t yet set, lawmakers say compromise legislation is emerging that could raise the state’s hotel room tax by 1 percentage point to rescue the rail project from its $2.5 billion shortfall. The increase would add about $2.35 to the average daily price of a hotel room.

In addition, the general excise tax rail surcharge would likely be extended for a few years.

House and Senate leaders could announce as early as Wednesday that they have the minimum two-thirds votes in each chamber needed to convene a special session beginning Monday.

Rail guideways near Waipahu High School. The Legislature is considering going into special session next week to find a solution to fund the project.

Cory Lum/Civil Beat

A bill to provide new financing for the City and County of Honolulu to finish its over-budget, oft-delayed rail project could materialize by Thursday.

Some lawmakers also want language in the bill requiring an audit of the rail project and possible punitive measures should HART and the city not abide by its findings.

If not, the FTA could ask that the $1.55 billion in federal funds allocated for the project be returned, even though more than $800 million has already been spent.

Negotiations ‘Positive, Constructive’

As of Monday, legislators say there was still no agreement on the particulars of the legislation. Many neighbor island lawmakers are opposed to a statewide increase in the hotel tax to pay for what is an Oahu project they contend has been severely mismanaged.

And lawmakers caution that there is also a chance the special session might not even happen. If there is a special session, the votes on a rail package could be close in the Senate.

Few legislative leaders want to have the embarrassing outcome of failing to strike a deal, as happened in the last week of the regular legislative session in early May.

“Negotiations have been very positive and constructive, and it appears that we will go into special session on Aug. 28,” said House Speaker Scott Saiki.

“I am hopeful,” said Senate President Ron Kouchi, who allowed that things could still fall through.

In June, House Speaker Scott Saiki announced a possible special session. But convening the session is still awaiting an official vote this week.

Cory Lum/Civil Beat

Saiki and Kouchi declined to provide details, but the two leaders have been talking — a lot. They had lunch and dinner on Sunday. They also attended a Democratic Party of Hawaii fundraiser, where the two were approached by colleagues seeking updates.

Based on interviews with more than half a dozen legislators, compromise legislation is being considered. Lawmakers requested anonymity so they could discuss the rail negotiations more freely.

A majority of the Senate favors an extension of Oahu’s general excise tax beyond 2027, like the bill that was voted on by senators in early May. But the House, especially Finance Chairwoman Sylvia Luke, rejects that plan, according to lawmakers.

Luke’s preference is similar to the bill agreed upon by the House during the last days of the 2017 session. That measure continued the GET surcharge for only one more year and raised the hotel tax — or transient accommodations tax — by 1 percentage point from 9.25 percent to 10.25 percent for 11 years through 2028.

Senate President Ron Kouchi, seen here at the Capitol in April, presides over a chamber whose members have favored an extension of the general excise tax to pay for rail.

Cory Lum/Civil Beat

The House bill also reduced the state’s administrative fee for the surcharge, called the “skim,” from 10 percent to 1 percent. The money would go to the city, as officials have long wished.

But the House bill also prohibited use of the TAT funds for rail operations and maintenance, and to pay for HART administrative and operating costs.

That last requirement is disliked by city officials, who would almost certainly have to increase property taxes to make up for the loss of funds. Georgette Deemer, Honolulu’s deputy managing director, said Mayor Kirk Caldwell prefers a 10-year extension of the GET and does not want to see a TAT increase.

One possible way to get neighbor island lawmakers to accept the statewide TAT hike is to ensure their share of TAT revenue — long a sore point — is not reduced. But some have vowed to oppose any statewide TAT increase, arguing that it will hurt tourism and their constituents.

Neighbor Island Opposition

Eight members of the Senate represent the neighbor islands, including Kouchi and Senate Majority Leader Kalani English.

Sixteen members of the House represent the neighbor islands, including Majority Leader Cindy Evans and Majority Floor Leaders Dee Morikawa and Kaniela Ing.

“It seems that most Big Island lawmakers and a good portion of the island are down on using the TAT,” said Big Island Sen. Lorraine Inouye, chairwoman of Senate Transportation Committee. “I do support rail, but it should be done with the GET extension. If it’s TAT, then it should be on Oahu only.”

A compromise bill might also include requirements for an audit, perhaps by the state auditor.

“I would like to see an annual audit, a running, robust audit,” said Big Island Sen. Josh Green. “I think people are appropriately worried about overruns and extra costs, and I think having a steady auditor on it would hopefully keep it on schedule and budget, with real deadlines.”

As Civil Beat reported earlier this month, a draft legislative analysis spelled out five possible options for rail funding. For now, with the House seemingly set on hiking the TAT, the Senate is pushing as well for a GET extension, perhaps for three to five years.

“I am cautiously optimistic that we will be able to agree on a measure that will complete the rail line to Ala Moana,” said Sen. Will Espero, vice chairman of Senate Transportation.

If an acceptable bill makes it out of the Legislature, the governor seems poised to sign it.

Gov. David Ige said in an emailed statement, “We need to make sure that we provide sufficient funding so that the project can be completed to Ala Moana.”

What Will Tourists Do?

There is one other factor in the rail special session: the 2018 elections.

The House and Senate shook up their leadership at the end of the 2017 session, in part because of disagreements over rail.

Since that time, several legislators have announced or indicated their intentions to run for higher office. Espero, Green and former WAM Chairwoman Jill Tokuda are considering runs for lieutenant governor.

A legislator’s vote on rail will certainly be a campaign issue, and lawmakers who opt to increase the hotel tax could face punishment from a powerful constituency.

“Tourists can and do vote. They vote with their feet.” — Ed Case, Outrigger Hotels and Resorts

With billions of tax dollars at stake, the lodging industry already has been pushing against a tax increase.

During a briefing at the Capitol last week, Ed Case, a former Hawaii congressman now working for Honolulu-based Outrigger Hotels and Resorts, testified that it was shortsighted to keep raising hotel taxes. Case said taxes at some point will drive tourists away.

“Tourists can and do vote,” he said. “They vote with their feet.”

On Monday, Case reiterated his position, saying that raising the rail tax was far from a done deal.

“I think it’s true that some members are leaning toward that,” Case said. “But frankly our information is the majority of the Senate and a majority of House members would support a GET surcharge extension.”

Mufi Hannemann, president and chief executive of the Hawaii Lodging & Tourism Association, is also opposing an increase in the hotel tax. His organization wants rail funded solely with the GET tax.

“GET is not as volatile as the TAT; it is broader and provides a much more stable revenue source. TAT revenues on the other hand have proven to fluctuate from year to year depending on the number of visitor arrivals,” Hanneman said in a statement.

Visitors to Honolulu now pay 13.75 percent of the cost of a hotel room in taxes, counting the hotel room and general excise tax. That puts Honolulu toward the middle of the top 150 urban centers based on total lodging tax-rate ranking for 2015, according to tourism consulting firm HVS Convention, Sports & Entertainment’s “2016 HVS Lodging Tax Report – USA.”

The proposal would increase the tax to 14.75 percent, or about $34 for an average Waikiki hotel room, based on an average daily rate of $234.84 provided by Outrigger in response to questions from legislators.

The average daily rate was provided by the firm STR (formerly Smith Travel Research) and reflected the overall market, not Outrigger’s rates, Case said. A 1 percent increase would equal about $2.35.

The situation has left lawmakers with a no-win choice: tax a powerful industry and risk driving tourists away, or increase the general excise tax, which most tax experts agree disproportionately burdens low- and middle-income people.

Increasing the hotel tax has another benefit over the general excise tax increase, said Tom Yamachika, president of the Tax Foundation of Hawaii, a nonpartisan tax-policy think tank.

The new tax would provide money sooner than an extension of the general excise tax, which would not kick in until 2027. The excise tax extension means Honolulu would have to borrow money to pay current costs and use excise tax money to pay off the loans, with interest, far into the future.

Some lawmakers have estimated the city could save $1 billion in interest by “front-loading” the payments by increasing the hotel tax.

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